One million dollars won’t buy much in Australia’s biggest city these days. According to Residex, the Sydney median house price stood at A$1.02 million in July 2015. At 9.8 times household income, this means Sydney homes have never before been so unaffordable.
With a median above $1 million, what can you buy for a mere half a million dollars? The answer is ‘very little’. Across most of the city, this sum is insufficient to buy any freestanding home. Studios and small units are the only viable option, unless you’re willing to take a punt on a ‘renovators delight’ in the far west of the city – in which case half a million dollars might buy an attached townhouse.
Here’s an example of a typical Sydney property in the half-a-million dollar range. This small 3-bedroom 1-bathroom townhouse in Blacktown, a lower-socioeconomic area 35km from the Sydney CBD, is advertised for A$479,000 to A$519,000.
With a typical gross rental yield of 3%, this property will return only A$15,000 per annum in rent – which is insufficient to cover the interest repayments, never mind maintenance, insurance, rates and property management fees. This mean that instead of putting money in your pocket, this negative cash flow property will actually cost you money to hold.
That’s not an appealing investment. But we can demonstrate a superior alternative. At current exchange rates, A$500,000 AUD is equal to roughly US$350,000, so let’s examine what this sum of money will buy in America.
The USA has a broad and varied housing market, and the US state that may be most comparable to Australia is Texas, with a similar population base of approximately 27 million.
Like Australia, the Texas economy has been powered by a commodities boom, however unlike Australia, other industries such as manufacturing, technology, and business services are also growing rapidly and boosting the jobs market.
Hugh Pavletich, author of the annual Demographia International Housing Affordability Survey, recently suggested that Australia should look to development and planning policies in Texas, which has managed to foster an affordable and stable housing market despite its similar demographics to Australia.
Government policy in Texas discourages housing speculation and boosts productivity by encouraging industries that most benefit the working population – for example, manufacturing.
And Texas enjoys permissive land-use regulation, with housing infrastructure provided efficiently through its MUD (Municipal Utility District) bond finance system. This means the Texas’ housing market is highly responsive to changes in demand, resulting in low volatility and affordable homes.
Texans enjoy high quality housing that costs less than half the price of equivalent Australian dwellings, and prices are very stable. Household debt is also low, further minimising risk in the real estate sector.
In fact, property is considered such a safe bet in Texas that many rental condos and units are owned by large organisations as a hedge against inflation and as a source of cash flow.
Texas is also one of the top US destinations for interstate migration, with a rapidly growing population. And Houston, the largest city in the state, is growing faster than any Australian city.
Houston has a population of over 6 million, yet its median house price is only US$150,000 (A$210,000) – one fifth of Sydney’s median house price.
Here’s a luxurious and stately freestanding 5-bedroom 3-bathroom home at 1914 Laurel Brook Lane, located only 27km from the Houston CBD.
This is a considerably more impressive dwelling than the Sydney example. And it’s closer to the city centre. You might naturally expect this home to cost more than the property in Sydney’s Blacktown.
But no – this home has just been purchased for US$182,500.
For the cost of the property in Blacktown, you could almost own two of these homes in Houston.
The Houston property will rent for US$20,000 per annum (a gross rental yield of 11%). Net cash flow, after rates/taxes, insurance, maintenance, and management fees will be US$10,000 per annum. That’s a positive cash flow of US$10,000 (A$14,000) in your pocket every year.
And you can buy two of these cash flow positive properties for roughly the same price as the negative cash flow Blacktown townhouse.
Similar homes are also available in the Dallas-Fort Worth Metro area, which has a median price of US$166,300, as well as many other parts of Texas including San Antonio and Austin.
So for the cost of an unappealing Sydney townhouse, you can purchase two vastly superior freestanding homes in the USA, giving you a much higher rate of return, as well as a lower risk profile.
Over the past year, the median house price across Texas has increased by 8%. Growth has been relatively stable at around 8% per annum since 2012. This is steady and sustainable growth, unlike the dangerous boom-bust conditions experienced in Sydney and other major Australian housing markets.
And the prospects for the overall US housing market are excellent, with house prices in the early stages of a new growth cycle. The US economy surged last quarter, as GDP expanded at an annual rate of 3.7%, outpacing the rest of the developed world. And housing construction jumped by 7.8%.
The US economic recovery has been much faster and stronger than most other nations, with President Obama recently commented on the strong figures, saying they show America remains “an anchor of global strength and stability”.
By way of contrast, Australia’s economy has just posted its lowest nominal GDP growth since 1961. Australia is struggling to recover from the collapse of the mining boom, with some economists are now predicting a recession in 2016.
Australian house prices are at record highs, at the peak of a two-decade-long bull run. With the risk of a housing crash weighing on their minds, it’s no surprise that Australian investors are investigating less risky overseas opportunities, such as the US housing market.
When the inevitable Australian recession arrives, and house prices crash, it would be wise for Australian investors to hold a diversified portfolio that includes overseas real estate.
This opportunity won’t last forever – the window is closing with each day that passes.
Cash buyers are purchasing US housing stock at a breakneck pace, and high-quality investment properties are becoming harder to find.
US banks are also relaxing lending criteria. This increases the number of qualified buyers, boosts demand, places upwards pressure on prices, and reduces the available inventory.
At American Properties, we can help you build wealth safely and reliably, in one of the world’s most exciting and lucrative housing markets.
If building wealth, diversifying your portfolio, and protecting your assets is something that interests you, then don’t delay – signup with American Properties today, and begin your journey to financial freedom.